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The 10-year US Treasuries a key driver of USD/JPY

Written Mario Blascak, PhD | 2018-01-10 05:48:00 GMT

The market reaction to the announcement of the Bank of Japan to modify its asset purchasing and to buy less of the long-term JGBs lifted the Japanese yield curve and in reaction to than the Japanese Yen rose, especially against US Dollar.
USD/JPY 15 minutes chart

Introduction of the yield curve control in an environment of negative deposit rate requires buying less Japanese government bonds without a formal change of the target. 

The policy move could be explained by the Bank of Japan balance sheet shrinking in December. The Bank of Japan balance sheet stands now at ¥521.4 trillion equal to 95% of Japan’s GDP.
While the balance sheet increased by ¥93.5 trillion in 2016, it rose only by ¥44.9 trillion in 2017 with December alone falling by ¥444 billion. At the same time, the volume of the JGBs in a portfolio of the Bank of Japan fell by ¥2.9 trillion in December only. As total balance sheet reduction is much lower compared to the drop in holding of JGBs, that means that the Bank of Japan kept on buying other types of assets. 

As such, this is not tapering, but simply a policy shift signaling the move away from targeting the balance sheet itself to targeting interest rates

In terms of the USD/JPY exchange rate development, the key driver remains the US 10-year yield.  Since the Bank of Japan introduced Yield Curve Control policy, Japan's 10-year yield has been stable and this means that the differential is rather driven by the performance of US Treasuries.
 

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Mario Blascak, PhD
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